Wall St. Woes - Will The Sell Off Continue?

Published date: 11/10/2018

Over the last few days, the major bourses all over the world have capitulated into chaos and equities have sold off. What has caused this madness? In one word, yields!

The hedge funds and investment banks of this world have been on the hunt for major safe havens since QE started to distort values in the recovery from last big stock market crash in 2007. Now the major central banks in the world are starting to unwind QE - the Fed ahead of the rest - fixed income products that used to offer impressive fixed returns due to ultra-low rates. These products are coming back to the front of investors' minds. The US 10YR Yield is the benchmark to watch as it ties in with the typical rate economic rate cycle of 8-10 years and since the announcement of tapering (the unwinding of QE), yields have risen from roughly 1.31% to 3.25%. 

It was the easy lending policy coupled with the buying of government bonds as part of the overall QE program that led the largest banks and funds into the stock markets, searching for dividends to optimise returns, but now it is all starting to unwind. Trump has now said - a few times in fact - that he thinks the Fed is moving too fast on rates and they are getting ''too cute'' (!), though politics should not interfere with monetary policy.

Yesterday, some analysts were noting ETF outflows from stock market products which may have been part of the reason the indices fell so dramatically and there is no doubt that this could be the case. One thing is for sure, exposure to ETF's has grown significantly and if this 'washout' continues. we could be in for a long and uncomfortable ride ahead!


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